ISOs and lenders are recognizing that business lending's not a one-size-fits-all proposition, and they have come to rely on merchant cash advances for some businesses and merchant loans for others. 

"They all want money, but you have to make sure the criteria works for them as well as the funding companies,” said Michael Steinberg, who works in Miami Beach, Fla., as an independent liaison between cash advance companies and ISOs.

Merchant cash advances withdraw a percentage of a business’ daily processing volume, meaning that the payment amount varies from day to day, whereas business loans require that merchants make fixed payments.

A merchant who earns the same dollar amount on a regular basis tends to be the best candidate for fixed loans. Merchants that bring in more business on the weekends, such as those in retail or hospitality, might be better suited for a cash advance.

Steinberg said he typically lays out the different lending programs and lets the merchant decide which one provides the best fit.

“You have to make sure that money is going to come back to you, so you’ve got to put them in a position where they’re comfortable making the payments,” he said.

Assisting a merchant that was stuck in the wrong kind of funding yielded new business for Turnkey Processing in Meriden, Conn.

The merchant had been paying more than $3,000 a month in NSF fees on a fixed loan from another provider. Every time a payment bounced, the merchant incurred a $30 NSF charge, and the business was averaging 100 charges each month.

Turnkey, which has its own in-house lending program, was able to board the merchant by restructuring the loan as a cash advance. “He’s become a good customer of ours. We’ve saved him a tremendous amount of money on those NSFs,” said Turnkey CEO Steven Martorelli.

Cash flow and credit profile tend to steer the funding approach, said Mike Fox, vice president of sales for Group ISO Merchant Services in Irvine, Calif.

Lenders usually pair a merchant with a cash advance if the business’ credit is below average. If the merchant has an above average credit score, the lender offers a business loan, he said.

Fox said he always tries to help merchants qualify for a business loan first because it gives the business more time to repay. Loans also tend to produce lower commissions for salespeople, and they therefore mean a lower payback for the merchant.

“It’s our job as salespeople to pick out what’s best for the merchant, not best for our pockets,” Fox said.

Some ISOs select a funding approach based on their own lending preferences and observations.

Loans seem preferable to cash advances for Ferne Glemby, president and owner of CardPlus Payment Systems LLC in Westwood, N.J. Glemby used to rely more on cash advances because they were fast and easy, but now she looks to other forms of financing, such as business-to-business lending, that allow merchants to get an extended loan term at a lower rate. “I try to save them money because that’s what’s going to make a stronger business,” she said.

Darrin Ginsberg, CEO of Super G Funding LLC, a lending company in Newport Beach, Calif., also favors loans with fixed daily payments as opposed to taking a percentage of his clients’ daily credit card sales because the returns are more predictable.

“If you take a percentage of daily sales, and those sales are better than anticipated, you get paid off faster with a better return. But if they are slower than anticipated, your return is significantly reduced,” he said.

Ginsberg said he sees a great deal of interest in business loans among merchants that don’t accept credit cards, and therefore wouldn’t be able to repay a cash advance through daily processing.

Other ISOs find cash advances more flexible than loans. Ocean Equity Group, a hybrid ISO and merchant cash advance company, does not offer fixed loans. CEO Ed Zinner said lenders are subject to laws that can raise the cost of doing business. Some states, for instance, cap the interest rate a lender can charge on a loan.

“When you involve regulations and constraints on what you can charge, I don’t know if you can get enough to cover your costs,” he said.

U.S. Merchant Systems in Fremont, Calif., offers about four cash advances to every loan it sells. The reason is that merchants prefer the flexibility of an advance to the rigidity of a business loan, said regional sales director Jeremy Abel. There are also fewer qualifications for obtaining a cash advance.

There are some benefits to loans that Abel takes into consideration. A business loan can provide 30% more funding than a cash advance would. There’s also more flexibility on rate because the loan takes into account the business’ stability and expenses.

“We don’t want to get a merchant into a situation where an advance or a business loan is going to hurt them,” Abel said.

Each type of funding has advantages and disadvantages, but ISOs said merchants tend to be happiest with whichever option puts their needs first.

Ginsberg of Super G Funding said some ISOs that offer cash advances do not always look out for their clients’ best interests.

“If an ISO can place a loan with a vendor that pays a 5% commission or a 12% commission, most ISOs are going to push the client to the lender that pays the 12% commission, regardless of whether it is a worse deal for the client,” he said.

Mercury Payments in Durango, Colo., leaves much of the decision up to third-party vendors who work closely with merchants to install their point-of-sale systems.

“By being there on site with the merchant, they know what is better suited for the merchant,” said Earl McGee, vice president of merchant operations and protection who runs Mercury Payments’ merchant financing program.

If a merchant needs money for a new store, a cash advance might be the best option because there’s no way to know what the merchant’s cash flow will be at that new location. But for a hardware or software upgrade that won’t affect cash flow, a loan tends to work better, McGee said.

“We’ve had great success with both types of programs and continue to see growth,” he said.

Martorelli of Turnkey talks to clients to get a feel for which funding type they prefer. “If you establish yourself as a consultant–someone who generally wants to put a business’ best interest before them–then either program will help with retention,” he said

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