Tuesday, April 29, 2008

Merchant Cash Advance Closing Fees / Consulting Fees / Personal Service Fees (PSF)

I've received countless emails about what my opinion is on agents / ISOs charging a customer an additional upfront fee on a merchant cash advance such as closing fees, consulting fees, finder's fees and/or personal service fees (PSF) and the answer is to the merchants "stay away and run." You can easily find another merchant cash advance provider that won't charge you any upfront fees and will save you potentially thousands of dollars. These fees put unnecessary strain on both the merchant and increases the risk to the merchant cash advance provider.

This money is expensive enough without an agent / reseller tacking on additional costs to the merchant. Merchants should know that an agent / reseller / ISO is receiving up to 36% of the fees that a merchant cash advance is charging the customer. For example, if a merchant receives a $20,000 advance and the payback is $27,600, the agent bringing the deal to the MCA provider can be receiving up to $2,760 in commission. The merchant is selling their receivable to the MCA provider at a $7,600 discount and the salesperson is receiving $2,760 of the $7,600 (which is 36% of the fees being charged).

Now for a agent to charge another 5% - 10% of the funded amount to the customer ($1,000 - $2,000) turns the deal from a 1.38 factor in this example to the merchant receiving $18,000 and paying back $27,600 turns the arrangement into a 1.53 factor (up from a 1.38), a huge strain on the merchant and increases the chance of merchant default as well as increased risk for the merchant cash advance provider. The agent is then earning it on both sides from the customer and the merchant cash advance provider and in this example earning $4,760 of the $7,600 discount (62% of the fees charged the customer). There is an old saying, the bears make the money, the bulls make the money and the pigs get slaughtered.

I've been told by some agents that there is no way they can make money without charging closing fees, my response to that is I've owned merchant cash advance agencies and you can easily make a lot of money in this business, especially with the equity value you build with merchant processing residual. For those that can't figure out how to make money without charging closing fees, please feel free to contact me and I would be happy to discuss a very viable model. My rebuttal to that is for those agents that have sold credit card processing, when is the last time you made $4,000 upfront on a merchant account plus receive the monthly credit card residual? Selling credit card processing is far more competitive compared to merchant cash advance.

There has been some negative press as of late about some of the sales practices in our industry and almost every single instance involved a sales agent / reseller charging an upfront fee on a merchant cash advance.

As the industry comes together to establish best practices, I would imagine and hope charging upfront fees will be one item that merchant cash advance providers prohibit.


Anonymous said...

I have been and always will be against charging upfront fees or closing fees to merchants. In addition, lying to merchants they have to lease new equipment to obtain a cash advance. its all deceptive practices to screw the merchant and pocket as much $$$ as they can. These ISO's are not in this industry for the long run who do these practices. If the MCA's prohibit this in their contract that no PSF's can be charged, it will end- It must be a united decision though or the ISO will just go to the next funder who allows it-

Anonymous said...

I am a dentist who did a cash advance during a slow economy with Merchants Cash and they charged me almost $5,000 in a "risk assessment fee". What a joke. I would never do business with them and would never recommend them to any of my colleagues. I do about $100,000 a month in Visa Mastercard sales and am a good client. They lost me, that's for sure.