At first, Pedro Alarcon felt reluctant to help fund his restaurant by signing up for a merchant cash advance from a company that wasn't a bank. But he'd had so much difficulty getting a conventional loan that the pitch from a company called AdvanceMe sounded too good to be true.
That was seven years ago. He signed up for that initial merchant cash advance and has continued to do business with the same company, now called CAN Capital, to the tune of 16 cash advances in excess of $2 million.
"It was difficult to provide [financial] information to people you didn't know," says Alarcon, who operates La Casa de Pedro restaurant in Watertown, Mass.
"With all of the scams going on this world, I was concerned about that, especially someone giving me money, with no collateral," Alarcon recalls. "It was very hard to believe, it took me a little while to realize that it was true."
It's a truth that's spreading throughout the merchant services industrymany merchants like alternative funding, and independent sales organizations are in a good position to provide it.
Merchant cash advances, which merchants pay back from future payment card receipts, have been around for some time. ISOs have offered them to merchants in the past, viewing alternative funding as a valuable service to provide alongside the point-of-sale terminals, mobile payments technology and security services they regularly offer.
With banks still cautious about lending during an economic recovery with lots of weak spots, merchant cash advance companies have found they're in the right place at the right time. And, in many cases, ISOs are welcome to join them.
CAN Capital CEO Dan DeMeo says his company has become the largest in the merchant cash advance business because of the experience it has gained through providing access to $3.6 billion in funding for more than 120,000 merchants in the past 15 years.
"We capture profile behavior and log our fundamental experiences to build our business model," DeMeo says. "It helps us expand the availability of these types of fundings in the market for merchants."
Working with ISOs and other partners is key for New York City-based CAN Capital, DeMeo says. "ISOs are absolutely core to our continued success because they are the ones in there selling the merchant services."
Providing merchants with access to needed cash is a "great up-sell opportunity" for an ISO and strengthens the relationship with a merchant, DeMeo says.
CAN Capital pays a referral fee, generally of 6% to 8%, to its partners for new cash-advance business, based on volume and other factors.
"We are signing up new relationships every day with the referral agreements, but we also have standards by which they have to follow in order for us to do business together," DeMeo says. "They have to be a good quality independent contractor or ISO for us to do business with them. We both have to be conscious of a shared reputation on this."
It's just as important for ISOs to evaluate cash-advance partners, says payments industry analyst Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group, LLC.
ISOs should also examine the marketplace, which offers a variety of funding products, and determine which ones they feel comfortable pitching, Ablowitz says.
"They range from something that is really expensive for a merchant to some alternative loan products that are very fair-priced and serving a need for merchants who need capital," he notes.
If the product seems "completely and totally above board and disclosed very well," an ISO could find alternative funding a lucrative part of a services menu, Ablowitz says.
"When a service like this is meeting a need in the marketplace, which there clearly is for alternative lending, and the price is fair and transparent, it is very clear-cut that merchants would want those products," he maintains.
Companies will seek to meet those merchant needs through various methods.
Rather than cash advances tied to payment card receipts, Anaheim, Calif.-based CashCall provides merchants with business loans ranging from $3,500 to $50,000 with minimum terms of two years and as many as 10 years.
Merchants pay off the loan with monthly payments from a bank account, and they can pay off the loan at any time without penalty.
"We are here for businesses that don't qualify for traditional loans or for those that have urgent short-term cash needs," says Kristof Anderson-Tsang, an ISO channel consultant for CashCall.
Merchants don't have to prove long-term business success to approach CashCall for funds.
"We welcome businesses that have been in business for two months or more," Anderson-Tsang says. "We've found that the reasons businesses come to CashCall range anywhere from emergency to opportunity. We can approve and fund the same day, so it's quick cash for any situation."
The company engages in "an active ISO program" that produces numerous leads, Anderson-Tsang says.
CashCall pays ISOs a percentage of the funded loan amount. There's potential for a larger payout because CashCall offers business loans up to two times the gross deposits of a business, Anderson-Tsang says.
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Corrected February 14, 2014 at 3:56PM: An earlier version of this story misstated the amount of funding CAN Capital has provided to merchants.