Selling your merchant portfolio? Should you evaluate a loan instead?
All businesses have capital needs from time to time, and merchant acquirers are no exception. The reasons are manifold: they range from growth initiatives, like acquiring another payment company or payment portfolio, to more defensive reasons like making rent or fronting downline agents’ upfront bonuses for new merchant boards. As a payment company founder, the decision of how best to secure that much needed capital can vary, but oftentimes it comes down to an “either or” decision of whether to monetize (sell) a merchant portfolio or its residuals, or use the same as collateral to take down a loan. And for many small-to-mid size ISOs, the choice of lending options can vary as well: such as traditional, low cost of capital bank loans for payment companies with sufficient cash flow to service that debt, or higher interest rate capital from private lenders for ISOs with limited cash flow but can use their merchant portfolio as collateral.
Though the process of evaluating options is complex, at least for starters, there are two fundamental questions that must be answered first.
- Is the need for capital a want or need? This question is often best answered by working backwards from the intended use of proceeds. Is it for marketing, or is it for a more serious issue like making payroll? Clearly the former is a want and the latter a need.
- Depending on how you answer the first question, the next question becomes an issue of timing, and when to begin the deliberation process of how best to go about raising that capital. If it’s a “need” situation, options are limited, selling your entire or partial merchant portfolio is no longer an option, and lending options are severely limited, leading to what will likely be unfavorable terms and structure. Alternatively, if it’s a “want” situation, then there’s no time like the present to begin the process of evaluating sell versus borrow.
Though there’s much more to consider when raising capital for your payment business – coverage ratios, term,cost of capital, new business obligations, pre-payment penalties, current market conditions, tax implications, portfolio KPIs, FCF, growth rate, and on and on and on – there’s a foundational maxim that all ISO owners must abide by: regardless of whether you decide to sell or borrow, you never want to raise capital when you need it, you want to raise it when you have maximum optionality.
