Friday, December 28, 2007

2008 Merchant Cash Advance Industry Predictions

As promised in my last article, the Merchant Cash Advance Year In Review, here are some predicitions for 2008.

1) Underwriting will tighten up / approval rates will go down - Many merchant cash advance providers have seen their share of bad debt this year. For a merchant funding company, it's no secret that no matter how much money you fund each month it's irrelevant if your bad debt eliminates all your profits (or even worse puts a merchant funding company into a loss). Too many companies tried to capture marketshare / attract new agents by funding deals whose industry doesn't work for this product, gave a merchant too much money then they should qualify for and were naive to identify merchant fraud. In 2008 you will see for the first time industries that NO merchant cash advance funding company will touch rather than the select few who were willing to take the risk in 2007 on high risk industries and they suffered the consequences.

2) Sales Agent Commissions will stabilize and/or decrease - 2007 was a bidding war between merchant cash advance companies to attract new sales agents / ISOs to resell their product. Many cash advance companies were new to the industry and haven't had the experience yet to understand the full profitability of the business. After factoring in the bad debt associated with the product and the quality of deals submitted by certain agents / ISOs, many merchant cash advance companies have come to the conclusion they can't make money by paying the ISO commissions they were paying. Many have already started to lower commissions or changed the pricing to the merchant to offset the higher commission. Some merchant cash advance providers have even terminated relationships with various agents / ISOs because they couldn't make money on the relationship. All the above factors I believe will lead to stablizied / lower commissions in 2008.

3) Self Regulation - The industry has grown to large and has too many providers to not have best practices / industry standards in place. In 2008, I believe you will see a group of the key merchant cash industry players come together to announce a set of best practices for not only the merchant, but practices to protect the merchant cash advance providers as well. In my opinion, the amount of fraud committed against the merchant cash advance providers by unscrupulous merchants and sales agents far exceeds the amount of unethicial practices that may have taken place by certain sales agents to merchants (no different then the problem that has existed for years of sales agents taking advantage of merchants when selling credit card processing services).

4) Mergers & Acquisitions - In 2008 I believe we will see the first major merger and/or aquisiton in the merchant cash advance industry. It will most likely come in the following form: 1) Merchant cash advance providers who run out of money will most likely be swallowed up by another merchant funding company. 2) You will see larger financial institutions looking to enter the merchant cash advance space. I believe you will see an outright acquisition of a merchant cash advance provider or a strategic investment in one by a larger player. 3) Two mid-size merchant cash advance providers merging together to become a larger player in the space.

All in all, I think 2008 will be a very positive year for the merchant cash advance industry. Demand for the product will continue to grow, especially with the recent credit crunch. Everything I mentioned above in some cases may be short term hiccups (e.g., harder for agents to get deals approved), but in the long term it will be more beneficial for the sales agent / ISO and the merchant cash advance industry to ensure this is a viable, long term career for all.

I wish everyone a happy, healthy and prosperous 2008.


Sunday, December 16, 2007

The Merchant Cash Advance Year In Review

It's hard to believe 2007 is almost over. 2007 was one of the most important years in the merchant cash advance industry. There were several stories and events that happened in our industry, here is a recap:

The biggest news of the year by far was the invalidation of the AdvanceMe patent. This blatently obvious patent which was practiced by others for many years before it was filed by AdvanceMe was not only the cover story of several industry publications including The Green Sheet and ISO & Agent Weekly but it was a featured 1/2 page story in The New York Times and The International Herald. If this patent was not invalidated, we could have seen the end to fair competition in the merchant cash advance space.

Another big story of 2007 in the merchant funding sector coincides with the meltdown of another industry, the subprime mortgage market. Since 1000s of subprime mortgage brokers are unable to earn the same income they were previously, many have migrated into the merchant cash advance space as reported in September this year in the merchant cash advance blog entry, Invasion of the Subprime Mortgage Brokers. I believe those former subprime mortgage brokers that were looking to make a quick buck realized like any business, it takes time, money and morale to earn a good living. Those that entered were lured with high hopes and promises that turned into reality - meaning that "bad deals" aren't getting approved and the commissions aren't as high as they were led to believe. We are starting to see an exodus already of several of these brokers who can't find a funding company to still work with them after a couple of months because the bad debt on their paper is so high. Those mortgage brokers that are taking the long term approach, selling this product properly and not looking to make a quick buck should do alright in the long run.

While 2007 saw many funding companies popping up in 2007 (at some point it seemed like that there were more merchant cash advance companies popping up than there were Starbucks or McDonalds), we also started to see some merchant funding companies leaving the industry in 2007. In addition, there are rumors circulating on a monthly basis of some credit card factoring companies running into challenges with their lenders / investors to the point that they have to limit the dollar size and/or the monthly volume of deals they can fund. There is no doubt in my mind that in 2008 you will see mergers and aquisitions within the merchant cash advance industry as well as some companies simply closing their doors.

Another top story for 2007 (especially the second half of the year) is the tightening up of approval rates by various merchant cash advance companies. It's not secret that if you are going to pay large commissions to buy marketshare (which you can only do for so long) and your bad debt is not at a controlable rate, it's a recipe for disaster. Several new MCA providers tried to buy marketshare in 2007 by paying large commissions to ISOs / agents to later either reduce the commissions, terminate the relationship with various sales agents and/or tighten up extensively on the types of deals they will fund. Just like credit card processing there will soon be business types that are virtually impossible to get approved for a merchant advance.

Last but not least, 2007 was the birth of the Merchant Cash Advance Blog. I have received 100s of emails since inception thanking me for taking the time to publish this resource. The daily traffic to this blog increases from month to month. I hope its content has been helpful since I started writing this blog on the merchant cash advance industry and as always I'm open to suggestions / comments for additional topics.

I would like to wish everyone a happy holiday and the next blog entry, predictions for 2008, stay tuned...

Wednesday, December 12, 2007

Merchant Cash Advance - EAR - Effective Approval Rate

Merchant Cash Advance sales people have always been very focused on what the commission is their merchant funding company is paying them. What most fail to realize it's not what your sales commission in your contract reads but your effective approval rate (EAR). Some merchant cash advance companies will offer teaser commission rates to get you on board and then you will soon realize they are approving 20 - 25% less deals then most and/or giving merchant's 20-25% less funding compared to other companies. Since commissions are typically based on the payback amount of a merchant cash advance, you can see how this can greatly vary and affect your overall commissions earn. In some cases, your actual commission rate may be up to 20 - 25% less than you think it might be based on these two factors.

Next article, the Merchant Cash Advance Industry - 2007 The Year in Review and Predictions for 2008.

Saturday, December 1, 2007

Merchant Cash Advance Industry Affected By The Subprime Mortgage Bust?

Many people have been asking me if the merchant cash advance industry has been affected by the recent subprime mortgage bust. We have found both a positive and negative scenario within the merchant cash advance industry. The negative thus far has been much poorer quality applicants for a merchant cash advance that we are unable to provide funding for (e.g., many people whose houses are being foreclosed on). The positive effect has been that we are also seeing some better quality applicants who in the past might have used traditional financing such as tapping into the equity in their home to help fund their business or a straight business loan from a bank. With the recent credit crunch and the decrease in real estate value in many areas of the country, many business owners are no longer able to use their home equity as a source of working capital for their business. It will be interesting to see if the positive is outweighing the negative for merchant fundings.

Wednesday, November 28, 2007

Merchant Cash Advance Article In The Green Sheet

Yes another article regarding selling a merchant cash advance appeared in the recent issue of The Green Sheet. Mike Evans, a Sales Manager from 2nd Source Funding in New York, wrote an article entitled Use rapport to score with cash advance. (Editor's note: Second Source Funding is a broker / sales agent for several merchant cash advance companies. I believe they also offer merchant fundings / business cash advances under the name Tribul Cash and BPS (Business Payment Systems) also based out of New York City.)

Mike points out several things that I've mentioned previously back in September, namely how former mortgage brokers are getting into the merchant cash advance business (see my previous blog entry - Invasion of the Subprime Mortgage Brokers).

I agree with what Michael is saying for the most part about how merchants are being inundated with merchant cash advance offers. The one interesting item he indicated is the average merchant cash advance factor rate is 1.38. My personal opinion, any merchant that is paying 1.38 for a cash advance can find the money less expensive for around 1.35 (which can add up to signficant savings to the merchant as the advance gets larger).

Monday, November 19, 2007

Merchant Cash Advance Companies Tightening Up

I keep hearing more and more people talking about how merchant cash advance providers are tightening up their credit criteria and eliminating certain industries that they will no longer provide working capital to. I predicted this would happen months ago, it's the same old story, you can't stay in business funding bad deals. My next prediction, the sales commissions being paid out currently will go down. As many cash advance companies mature and review their financials / profitability they will see they can not turn a profit by funding this type of merchant and paying out the level of commissions that they have been. I've already seen in the marketplace several merchant cash advance companies telling agents/ISO/resellers that they no longer want their business and/or lowering their commissions.

Wednesday, November 7, 2007

Merchant Cash Advance For $1 Million?

Merchant Cash Advances historically have maxed out in the range up to $150,000 - $200,000 per location, with the average amount being $20,000 - $25,000. There are a handful of companies now that are targeting a new market of $150,000 - $1 million+. These transactions are being structured more like a loan product, with closing fees and at a cost to the merchant comparable to hard money lenders. The credit criteria is much more stringent than a traditional merchant cash advance as the cost is lower. Sales agents shouldn't get excited too quickly, the commissions are typically much lower as well with this large advance product at a lower cost. The commission on a $1 million merchant loan product can be the same as a $200,000 traditional merchant cash advance. Providers of these high volume loans are betting that the bad debt will be lower because the cost is lower and the credit criteria is higher. Are they correct? They jury is still out and it will be interesting to see how this model evolves.

Wednesday, October 31, 2007

A little off the merchant cash advance subject - a ceremonial first pitch of the 2007 World Series - Boston Red Sox vs. Colorado Rockies

While this particular post doesn't have much to do with the merchant cash advance industry (other than the fact that I'm the President & CEO of a merchant cash advance company), this was something I did that was too cool not to post the video, throw out a ceremonial first pitch for Game 3 of the 2007 World Series.

Thursday, October 25, 2007

Merchant Cash Advance Blog - 2007 Industry Funding Estimate

I have received several emails in recent weeks asking me what I think the current size of the merchant cash advance industry is. While there has been no formal report / survey ever conducted, I have done some informal research talking to several of the major players in the space (and have ideas of what most are doing) and I believe an accurate number for 2007 would be $1 billion in merchant cash advances funded in 2007. I estimate this number is up from $500 million in 2006 and will only continue to grow over time. Any feedback on this projection / estimate is welcome.

Wednesday, October 24, 2007

The story that doesn't want to die - the AdvanceMe Patent Invalidation

Yet another industry article about the invalidation of the AdvanceMe patent. This one is titled Time's up for one cash advance patent and was featured in The Green Sheet and written by Adam Atlas. Editor's Note: Adam is an industry attorney and I've personally used him and highly recommend him.

Wednesday, October 10, 2007

Merchant Cash Advance Companies Coming And Going

While a day doesn't go by that you hear stories of new companies popping up in the merchant cash advance space, I think you are also going to start seeing some merchant cash advance companies exiting the space and/or going out of business. For example, I've heard rumors that Acacia Funding has or is about to exit the merchant cash advance space.

I don't think most people realize the complexity and risk of this business. On top of that, companies are paying commissions out to brokers and agents that make it virtually impossible to turn a profit. Unfortunately some of these companies (and agents, brokers, ISOs that sell for them) will learn the hard way.

As an agent, you want to make sure you are working with a company that has the proper experience. High commissions by someone entering the industry may seem attractive, but a) it can't last long b) if they go out of business, you will most likely lose the backend residual associated with the deals you brought them.

AmeriMerchant has been in the merchant cash advance space for over 5 years and we have a very good understanding of what works and what doesn't and every indication shows by our explosive growth that we will be here for the long term. If you are a reseller / agent / broker for a merchant cash advance company, you want to make sure they have a viable business plan and they will be here for the long run too, unfortunately many will not.

Thursday, September 27, 2007

Invasion Of The Subprime Mortgage Brokers

With the subprime mortgage bust, it's only natural that thousands, if not tens of thousands of mortgage brokers around the country are having difficulty making ends meet. There appears to be an astounding number of mortgage brokers looking to enter the merchant cash advance space. In the past few months alone, I have received a plethora of inquiries from mortgage brokers looking to resell our merchant cash advance product.

While there seems to be some similarities between the subprime mortgage space and the merchant cash advance space, there is also quite a bit of difference. I am hoping the subprime mortgage brokers learned their lesson and will act responsibily when selling merchant cash advances by not taking advantage of the merchant (eg. charging closing costs, application fees, etc.). Acting responsibly will ensure that this is a viable industry that will benefit the merchants, the merchant cash advance companies and their agents for the indefinite future. There is enough margin in the product to go around without having to be a pig.

Sunday, September 16, 2007

AdvanceMe Patent Invalidated - Cover Story of The Green Sheet

The story of the invalidation of the "obvious" AdvanceMe patent just keeps on going. As I mentioned in previous posts, the New York Times wrote an article about it, University of Washington School of Law has made the story of the AdvanceMe patent invalidation part of the course curriculum for its Intellectual Law class and it has been the feature story of many publications.

Once again, the story behind the AdvanceMe patent invalidation is the COVER STORY of The Green Sheet, one of the largest credit card processing industry publications. The September 10, 2007 issue features the cover story, "AdvanceMe patent ruling opens merchant funding floodgates."

To update everyone on some facts since this article written, it indicates that the case AdvanceMe v. AmeriMerchant (the companion case to AdvanceMe v. Rapidpay) was scheduled to goto trial in January 2008. The article indicates, "experts predict it will be dismissed as a result of the August ruling."

Indeed this has already happened, the court dismissed this case shortly after the AdvanceMe patent was invalidated.

Two other items to point out about this article. In the print version of The Green Sheet September 10, 2007 edition page 67, there is a featured quote of the article that indicates:

"When you call someone and say, 'I'm being sued,' the first thing they think is, 'I don't want to get involved,' not 'Oh, I want to go through all my dusty old file cabinets,'

– Glenn Goldman
CEO, AdvanceMe

This is an actually a mistake as you can tell, that was actually my quote that appeared in the article earlier that they highlighted later saying it was Glenn Goldman that said it.

However, Glenn Goldman, CEO of AdvanceMe is quoted in the New York Times article and other publications as well as The Green Sheet as saying, "Although we feel vindicated that the court found clear infringement of our patent by each of the defendants, we respectfully disagree with the court's findings on validity."

That is not a typo my friends, Glenn feels vindicated that the court found that the defendants in the case infringed on an invalid patent that is unenforceable and OBVIOUS. Enough said......

Tuesday, September 11, 2007

New York Times Article On The AdvanceMe Patent Is Now Required Reading At University Of Washington School of Law

It still amazes me the volume of ongoing positive response I received from the NY Times article that was published on the invalidation of the AdvanceMe Patent. Someone had sent me a link today that this article is now a required reading assignment in an Intellectual Property Law Course at the University of Washington School of Law.

Saturday, September 8, 2007

Subprime Mortgage Bust And Its Affect On The Merchant Cash Advance Industry

There isn't a newspaper, magazine or TV show these days you can turn to that isn't talking about the subprime mortgage bust. In fact, even President Bush has had to step in to assist in this national dilemma. Many people have been asking how will this credit crunch affect the merchant cash advance industry? My opinion is that it will actually increase the demand for a credit card factoring product such as the merchant cash advance. Traditional banks and other lending sources have already started to tighten up their already rigid underwriting criteria. In addition, many business owners in the past have used the equity in the house to refinance to obtain working capital for their business. With the refinance industry drying up coupled with the tightening of banks underwriting criteria will only attribute to an increase in market demand for the merchant cash advance for the foreseeable future.

There are also many positive attributes about the merchant cash advance product that can assist and/or correct someone that may have had a subprime mortgage or loan. Here are a couple of attributes that a merchant cash advance has that is more favorable than what a subprime mortgage or loan was:

  • Documentation - there are reports that homeowners were able to get a subprime mortgage or loan with little or no documentation, employment verification, etc. A merchant cash advance is just the opposite. Any reputable merchant cash provider should be doing due diligence on the merchant which includes various document (proof of ownership among other things) and business income verification (the merchant's credit card processing statements).

  • No closing costs of fees - many subprime mortgage or loan brokers were charging extremely high upfront closing costs and fees. Any reputable merchant cash advance provider should be charging NO CLOSING COSTS. Any merchant that is even considering paying a merchant cash advance provider a closing cost should RUN from that provider. There are plenty of merchant cash advance providers that don't charge a closing cost.

  • No surprises in the payback - part of the cause of the subprime mortgage bust is many people entered into Adjustable Rate Mortgages (ARM). These programs typically started off at a lower "teaser" rate and readjusted to a higher rate in most cases anywhere from a year to a few years later. A merchant cash advance has a fixed percentage of a merchant's future credit cards sales that is paid back over the course of the program whose percentage should never adjust.

I think the subprime mortgage bust is an opportunity for the merchant cash advance providers and their sales channels to responsibly introduce this product to people that previously may not have consider it.

And I think the merchant cash advance industry can learn from the mistakes of the subprime mortgage industry by not taking advantage of the customer with upfront fees and being responsible in their underwriting practices.

Thursday, August 23, 2007

New York Times - AdvanceMe Patent Invalidated - Extra, Extra Read All About It

The news about the AdvanceMe patent invalidation has spread like crazy (Including internationally).

I thought the way all the prior art was gathered was a unique story and apparently the New York Times did as well. You can see the article written entitled Playing Detective In A Patent Case.

In addition, the Electronic Transaction Association (ETA), the leading industry association of the credit card processing industry has a link right off their "latest news" section of their homepage entitled, AdvanceMe Patent Ruled Invalid.

The Wall Street Journal wrote about the AdvanceMe patent invalidation and referenced the NY Times article specifically how myself, David Goldin, President & CEO of AmeriMerchant was instrumental in invalidating the patent.

The story was also the cover story of ISO & Agent Weekly. A link to the article can be found here.

Prepaid Trends (page 8 of this issue) talks about how the US District Court ruled the AdvanceMe Patent invalid and I am quoted in the article saying, "If AdvanceMe had won, it would have had a legal monopoly on a patent that was not a novel idea."

It has even hit the international press. The International Tribune published a story about how the prior art was found to invalidate the AdvanceMe patent.

Payments News mentions the New York Times article today.

The intellectual property legal community has even given the Merchant Cash Advance Blog credit in assisting the invalidation of the AdvanceMe Patent. The 271 Patent Blog recently ran a story about this case.

And speaking of the intellectual property community, Vinson & Elkins, our attorneys in this litigation have posted a news release about this case. I also wanted to take the time to thank the team at Vinson & Elkins for their extraordinary work they have done on this case. We couldn't have chosen a better IP firm to handle this matter in the Eastern District of Texas. My hat goes off to Bill Schuurman, Brian Buss, Joey Gray, Floyd Walker, Hilary Preston and Graham Sutliff for their work to invalidate this patent (And for their patience of putting up with a lot of smoke and mirrors thrown to us by the other side and their attorneys). If any one of you are lucky enough to be sued like I was over patent infringment (or if you are the holder of a legitimate patent that you are looking to enforce), I couldn't recommend Vinson & Elkins highly enough for all they have done not only for my company, but the entire merchant cash advance and credit card processing industry.

If you need to choose local counsel for the Eastern District of Texas, Potter Minton was our firm and my thanks go out to Doug McSwane and his team.

I have to give a very special thanks to Jeff Sanders of Roberts & Ritholtz. Jeff was not only instrumental in helping the defendants choose Vinson & Elkins as national counsel and Potter Mitton as local counsel, but provided strategy that was second to none throughout the case.

I also want to thank everyone that came to trial, namely Tim Litle, Larry Bouchard, Lee Suckow, Skip Landon as well as everyone that provided testimony in the case including the former AdvanceMe employees.

And finally, a very special thanks to those not named above that made it possible for me to be able to fight this fight, you know who you are and thank you.

Tuesday, August 14, 2007

AdvanceMe Patent Invalidated

As many of you know, I have been involved with a lawsuit from AdvanceMe the past year and a half over their “patent.” They have sued my company and other merchant cash advance companies. Well, I am proud to say we just received word from the court that Judge Davis from the Eastern District of Texas has INVALIDATED the AdvanceMe patent in one of the AdvanceMe patent cases. He writes in his MEMORANDUM OPINION AND ORDER on August 14, 2007 in ADVANCEME INC. vs. RAPIDPAY, LLC, ET AL that “The ‘281 patent is INVALID because it is OBVIOUS and ANTICIPATED."

Judge Davis also wrote, “The Litle & Co. prior art, the LeCard program, the Transmedia program, and the prior art Reserve Accounts were all available in the field at the time of the purported invention. Johnson [-- Barbara Johnson is listed as the inventor of the patent --] merely implemented a predictable variation of these existing methods in establishing her invention. While Johnson’s work exhibits excellent entrepreneurship, it does not entitle AdvanceMe to a legal monopoly on this method of providing financing to small businesses. Rather AdvanceMe must continue to compete in the marketplace for its share of the market, which will benefit the economy and consumers as a whole.”

I believe this is also the first patent case in the Eastern District of Texas whereby the recent Supreme Court ruling on patent obviousness in the KSR Int’l Co. v. Teleflex, Inc. helped invalidate a patent. In reference to the Supreme Court ruling, Judge Davis wrote,"There are multiple prior art references, not considered by the PTO when issuing the patent,that render the patent invalid, especially in light of the Supreme Court’s recent ruling in KSR Int’l Co. v. Teleflex, Inc."

I would like to thank all of those that have helped me put together the information that was used to show the court that this patent was not a new and novel idea.

Any comments can be sent to

Friday, August 10, 2007

AdvanceMe Patent Lawsuit - looking for Dining Ala Card Information

As many of you know, AdvanceMe got a patent issued that is about a credit card processor paying someone other than the merchant to reduce an outstanding obligation. You can see more about it at:

AdvanceMe has started to sue many companies including mine, AmeriMerchant. We are set to goto trial in January and have a deadline coming up with the courts in August that we must produce all information / evidence that we will be using in trial.

We believe that companies were performing this "invention" well before July 1997 when it was "invented." A patent becomes invalid and unenforceable if one can prove that invention was not novel at the time the application was submitted to the patent office even though it was granted by the patent office. Furthermore, if the inventor knew about similar / existing inventions and didn't tell the patent office then it becomes invalid as well and the plantiff (in this case AdvanceMe) can be liable for legal fees.

With that said, we have identified several prior art systems to invalidate this patent (if you know of any others, please feel free to email me at All inquiries will be kept confidential). One such system was Dining Ala Card that provided cash advances to merchants and was repaid out of a merchant's future credit card receipts (this took place in the early 1990s).

We are currently seeking "prior art" (printed publications, websites, marketing materials, merchant agreements, etc.) dealing with Dining Ala Card prior to July 1997. If anyone knows where to find (or has) Dining Ala Card marketing materials, agreements, merchant contracts, and/or knew how it operated, knew someone that will know how it operated, etc. please email me at All inquiries will be kept confidential.

If anyone had interacted with senior management at AdvanceMe prior to September 2005 and believes they knew about similar systems (eg. Clever Ideas, Transmedia, idine/Rewards Network, etc.), please please email me at All inquiries will be kept confidential.

If someone also knows about credit card processors paying third parties instead of the merchant directly before July 1997, please email me.

We believe we have a very strong case that this patent is not a novel invention and there were many lenders/creditors, etc. that were getting paid out of credit card receipts before July 1997 and if the patent office was told about these systems/companies by AdvanceMe during patent prosecution, this patent would never have been granted.


Tuesday, August 7, 2007

Thanks & Ask The Blogger

I wanted to thank everyone for all the positive feedback / emails I've received since launching this blog. This website has already been featured in many well respected industry publications including The Nilson Report.

My next entry I would like to answer some industry questions that might be out there. Please feel free to post your questions by clicking on the comments link below about the merchant cash advance industry or you can email them directly to me at


Friday, August 3, 2007

Merchant Cash Advance Industry Has Become Mainstream

Within the past two months, I've been contacted by reporters of a half dozen non-credit card processing industry publications such as big city newspapers, business magazines and local papers who are all planning stories on the merchant cash advance phenomenon. There seems to be a basic underlying premise of all these articles that there is a huge demand in the marketplace for this type of alternative financing as many business owners can not get financing from a bank.

I've heard many nay-sayers tell me that the merchant cash advance space is just a fad. My response to that is in 1995, when I first started my previous business an Internet development company, there was a gentlemen that told me the Internet was just a fad too (Note: I sold that business three years later to a multi-billion dollar telecommunications company). I hope the merchant cash advance industry grows to be at least 1/1000 of the "Internet fad."

Tuesday, July 31, 2007

Paying off existing advances

One thing you will see very quickly once you begin selling merchant cash advance products is that you will come across merchants that are already in an existing merchant funding program. Similar to other financial products such as credit cards, mortgages, etc. there exists a large refinance model in the merchant funding industry.

What I mean by this is a merchant cash advance provider will provide a merchant who already has an advance with another provider the funds to pay off their existing advance and potentially have excess funds after paying off their balance. As someone who is selling this product you want to make sure that the merchant cash advance provider who is going to refinance the merchant, will pay the balance on the advance to their "last provider" directly and not to the merchant with the hope that they will pay the provider. The reason being is the merchant may not pay off their old advance and hence violate their contract by having two advances at once. In addition, you as the sales rep can potentially be liabile for something called "torturous interference" meaning that you knowingly helped the merchant violate its agreement with their original merchant cash provider.

The best way to avoid any trouble for the merchant, a sales rep or the new merchant cash advance provider is to ask a merchant if they are currently in a working capital program that requires them to either use a specific credit card processor exclusively or pay off their existing balance should they utilize another type of financing product after they got their initial merchant funding. (In almost all cases, the answer is yes). A responsible way to handle this is to ask the merchant for their current merchant cash advance statement which will show their balance and provide it to the new merchant cash advance provider that will be refinancing them. The new merchant cash advance provider should pay off the old provider directly and everyone will be happy and performing "best practices."

Tuesday, July 24, 2007

Never Use The Four Letter Word

When you were child, you were probably taught to never use certain four letter words. In the merchant cash advance space, there is one word letter word that you never should be using when presenting this product to a merchant, "L-O-A-N."

Any person selling a true merchant cash advance product that is a factoring product, meaning you are purchasing a merchant's future credit card receivables at a discount, you need to understand the difference between a loan and a factoring product such as a merchant cash advance. (Note: there may be some "loan" products offered by companies to merchants that this article may not apply to, so I would check with your merchant cash advance provider whether or not they are offering a loan product or a factoring product. Almost every product I know of in the merchant cash advance industry with the exception of one or two is NOT a loan product). There are various state usury laws (usury is typically defined as the the maximum interest rate allowed by law) that a loan product must comply with.

The first distinction between a loan product and a merchant cash advance is there is no fixed time period with a merchant cash advance. For example, if you walk into a bank, every loan product they offer has a fixed time period - eg. a 30 year mortage, a 5 year auto loan, a 5 year SBA loan, etc. With a merchant cash advance, a merchant is simply agreeing to sell a percentage of their future credit card receivables at a discount and allowing a merchant cash advance provider to collect those payments by taking a set percentage of a merchant's future credit card processing sales. For example, lets say you purchased $20,000 worth of future credit card processing receipts for $16,000 from ten different merchants on the exact same day. And in this example, the agreement called for the merchant to collect 20% of the merchant's future Visa/Mastercard sales until $20,000 was collected and the advance was paid off. Each of the ten different merchants will pay off the advance in ten different time periods - one merchant may take seven months, another nine months, another twelve months, etc. Again, unlike a loan, there is no fixed time period with a merchant cash advance.

Another distinction between a loan and a merchant cash advance is there is no fixed monthly payment. A loan requires a fixed monthly payment amount (or in the case of some mortgages, a fixed bi-weekly amount). With a merchant cash advance, there is no fixed monthly payment as we are taking a percentage of a merchant's future credit card sales. For example, if a merchant's cash advance contract calls for 20% of their future Visa / Mastercard sales and they process $10,000 worth of these sales in Month 1 after taking the advance and $5,000 worth of future Visa / Mastercard sales in Month 2, then the amount they will pay back the merchant cash advance provider will be $2,000 Month 1 (20% of $10,000) and $1,000 Month 2 (20% of $5,000). As you can see, unlike a loan, there is no fixed monthly payment with a merchant cash advance. In addition to a legal difference, there is also a cash flow benefit to the merchant with a merchant cash advance compared to a traditional loan. That is, if their sales slow down, the amount they owe their merchant cash advance provider slows down since it's a percentage of their future sales that determines how much they pay back each month on their advance. With a bank loan, a merchant has to worry about making a fixed monthly payment to the bank regardless of how sales were that month. If they can't, they can default on their bank loan which can include the bank eventually foreclosing on personal assets that the borrower may have had to pledge.

Another difference between a merchant cash advance and a loan is there is no interest being charged with a merchant cash advance. A loan has an interest rate, while a merchant cash advance does not. A merchant cash advance involves buying future credit card sales at a discount. For example, if you are buying a merchant's future credit card sales for .75 on the $1, then you would purchase $10,000 worth of future sales for $7,500. You are buying these sales at a 25% discount, this is a discount (remember, this is a factoring product), not an interest rate. One of the reasons why there is no interest rate is because as discussed above there is no fixed time period to collect these sales purchased, it can take seven months, twelve months, fifteen months, etc. The time period it will take to pay off the advance is unique for each merchant as it is based on how much credit card sales the merchant actually processes
since they received the advance.

One of the key differences between a loan and merchant cash advance is their is no recourse with a merchant cash advance. One of the key attributes of a loan is there typically is a personal guarantee. A true merchant cash advance should be a purchase transaction and there is no recourse to the owner should they legitimately go out of business. With that said, this is not a free for all for fradulent merchants to take a cash advance and not pay it back. Most merchant cash advance provider contracts will have a fraud guarantee on the merchant personally. Some examples of a fraud guarantee where a merchant can be held personally liable are if a merchant misrepresented the information on their application that the merchant cash advance provider used to approve them, sells their business without paying off their balance on the advance, and/or disrupts the merchant cash advance provider's ability to collect the future credit card sales they purchased (this can be done by changing compatible processors, blocking ACHs, changing bank accounts, etc.)

In conclusion, when selling a true merchant cash advance product, you should be using the correct terminology such as "advance" instead of "loan" and "discount" instead of "interest." If a merchant asks you what is the difference, you should be able to point out the attributes of a merchant cash advance discussed above which are no fixed time period, no fixed monthly payment, no interest rate and no personal recourse.

To properly inform the merchant the type of product you are selling, I recommend putting a notice on your website, marketing materials, etc. that indicate it's a merchant cash advance. Something to the effect of "Note: This is a merchant cash advance factoring product and not a loan product."

Sunday, July 22, 2007

Controlling The Cash Register

Many people that sell cash advances have approached me and asked "what kind of business works best for this product." I think the best way to answer that question is by answering the question "what type of businesses don't work well with this product." What I mean by that is while every merchant cash advance provider has different underwriting policies, they all typically are purchasing future credit card processing receipts at a discount. And if a merchant cash advance provider continuously provides working capital to businesses where they can not collect those future credit card processing receipts, it's common business sense to realize that merchant cash advance provider will not be in business for long.

It would make common sense to market to industries that will have a higher and easier chance of being approved by underwriting. The number one type of business that I would avoid marketing to is one that can "control the cash register." (It's a term I used to describe when the merchant can easily advise on the fly to the customer what payment method to use - whether it's a specific credit card type, or even paying by check or cash). What I mean by that is most merchant cash advance providers are repaid by collecting a percentage of a merchant's future credit card sales. If a merchant can easily control the cash register, there is a greater chance they will attempt to defraud the merchant cash advance provider.

Lets take an example of two merchants, one is a home improvement contractor that only receives 2 credit card payments a week (batches out 8 times a month) and the other business type is a liquor store that accepts on average 40 credit cards a day (batches out 20 times a month). The contractor processes $60,000 a month and the liquor store process $30,000/month in Visa/Mastercard sales from their customers. The contractor's average ticket is $7,500 and the liquor store's average ticket is around $37.50. Now lets assume both merchant funding contracts of the general contractor and the liquor store indicate that the merchant cash provider purchased 20% of all future Visa/Mastercard sales until they are paid off. That would mean on average everytime the general contractor made a credit card based sale, the merchant cash advance provider would be entitled to $1,500 (20% of the $7,500 average ticket) and everytime the liquor store made a credit card based sale, the merchant cash advance provider would be entitled to $7.50 (20% of the $37.50 average ticket).

Now, lets keep in mind the $7,500 and $37.50 in each example due to the merchant cash advance provider everytime the merchant is supposed to make a Visa/Mastercard sale while I discuss "controlling the cash register." Because the general contractor typically only has one customer a day (if that) that is paying by credit card, isn't in a retail environment and typically isn't delivering the product to the customer right away (future delivery) they can easily say to the customer, "when the job is done, if you pay me with an American Express card or check I can deduct 10% off the price." What the contractor has done here is saved $750 in their cash flow(normally 20% of the transaction or $1500 would have been paid back to their merchant cash advance provider if a Visa/Mastercard was used by the customer to make payment), but instead $0 is paid back to the merchant cash advance provider because the merchant circumvented the system by advising the customer to use an American Express card. By doing so, the merchant "saved" $750 (they gave 1/2 in discount to the customer) in that case and in turn they are deceiving the merchant cash advance provider that previously gave them working captial. The merchant cash advance provider did not get the 20% of this transaction ($1,500) they were entitled to that would have went against the merchant's balance and to the merchant cash advance provider.

Now lets look at the liquor store example, typically it can be in a fast paced environment, people don't have checks on them, there is no future delivery (they customer gets the end product typically at the time of sale) and we have found merchants are less inclined to default on their agreement with their merchant cash advance provider in a low ticket environment to ask their customers to use a card other than Visa and Mastercard that would prevent the merchant cash advance provider from receiving their percentage of future sales they have made. They would have to do 100 defaults on their merchant agreement at $7.50 (meaning to instruct the customer not to use a Visa/Mastercard to make a purchase, but another credit card or payment type) each to equal the 1 time the contractor has to do it to bypass the $750.

To sum it up, if you are spending marketing dollars to market this product, the number one type of business I like to avoid are ones that meet the criteria of the general contractor mentioned above - large average ticket items, low number of batches each month (I typically consider low under 12- 15 times a month) and future delivery (where the customer is coming back in most cases and can prearrange a payment method).

With that said, you want to focus your marketing efforts on those businesses with low average tickets, batch frequently (at least 12 - 15x a month on average) and have no future delivery of their products/services - basically where the merchant can not "control the cash register."

Saturday, July 21, 2007

Welcome to the Merchant Cash Advance Blog

The merchant cash advance industry has evolved into a rapidly growing industry since the product was originally introduced almost twenty years ago by such pioneers as Litle & Co, Clever Ideas, and Transmedia (which merged / acquired companies like Dining Ala Card into what is now Rewards Network today, the former iDine). Today, there are estimated to be over twenty-five merchant cash advance providers and hundreds of agents, ISOs, and brokers offering the merchant cash advance product through various cash advance providers.

The merchant cash advance product has received even more attention recently as its "sister product" credit card processing is experiencing more competition than ever and the margins on bankcard aquiring are being squeezed tighter than ever. Furthermore, ancillary products to the credit card processing residuals such as selling / leasing of terminals which used to be an upfront cash flow stream for the ISO/agent is now almost non-existent with the introduction of industry wide free terminal programs. Due to a decrease in revenue potential in revenue for ISOs, agents and sales representatives in the credit card processing industry there has been a recent migration of these people entering the merchant cash advance space either as an "add-on" product or completely changing their business model to selling merchant cash advances full-time.

As more and more people are selling this product, capital is becoming more and more readily available to businesses nationwide that may not have access to traditional lending sources. Because a merchant cash advance is typically not a loan, but a factoring product because it's a sale of future credit card receivables, it allows for a provider an alternative underwriting method to provide working capital to merchants that may have not normally qualified for under traditional underwriting formulas.

It is estimated in 2007 alone that $600 million - $700 million worth of merchant cash advances will be provided to help grow tens of thousands of businesses nationwide. With that said, the marketplace has become extremely competitive. One example is on a recent trip to Texas I was dining in a small restaurant. I had asked the owner of the restaurant if he ever heard that he could get access to working capital by selling his future credit card receivables. His response was, "not only have I heard of it, I get at least four to five companies a week trying to sell this product to me in one form or another, either face to face, in the mail, or over the phone."

I have seen various posts / questions about merchant cash advances on various websites across the Internet including credit card processing sites, financing sites, etc. but no destination site that is exclusively dedicated to the merchant cash advance industry.

I hope this will be the beginning of what will be a destination site that will be informative and resourceful for those in the merchant cash advance industry. As President & CEO of one of the largest merchant cash advance companies in the industry, my goal is to take my five years of merchant cash advance experience to educate and inform those that are currently in the industry as well as those that are looking to enter the industry. As this website evolves, I hope it to be a resource for those currently working in the merchant cash advance industry as well as those looking to enter the industry. Items like industry trends, job boards, discussion forums, industry news, etc. will all be part of this merchant cash advance destination resource.

I also encourage you to email me with any questions, comments, etc. about this website and/or the merchant cash advance industry and I would be happy to answer them. I can be reached at

-David Goldin