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."

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 dg@amerimerchant.com.


-David Goldin